Jess McCabe

A sales warning for housing associations? (Inside Housing)

Parts of the South East of England’s housing market are slowing. But what are associations experiencing on the ground? Jess McCabe investigates. Illustration by Michelle Thompson

No-one watching the housing market can have failed to see the signs of a slowdown in the South East.

House prices dropped 0.5% in the region last year, and 0.6% in London, according to broker Jefferies. But more significantly for house builders, the number of property transactions shrunk 12% last year, according to Search Acumen, which tracks the conveyancing market.

Most of this seems to be affecting the top end of the market. But a look on Zoopla at the most discounted new homes on sale in the region brings up many modestly priced market sale and shared ownership homes discounted much more dramatically than this, some by over 30%, and many advertised by housing associations and their subsidiaries.

Traditionally, a becalmed housing market would be of little concern to social landlords. But is that still the case, given that so many are now looking to market sales to cross-subsidise affordable housing?

Clearly, associations are paying attention. “We have seen some evidence of house prices slowing down in the South East,” says David Gannicott, group director of business development at 50,000-home Hyde.

If you talk to the development and sales directors of these housing associations, many answers you get are confident. Clarion, which manages 125,000 homes, has two large private-sale developments at present, one in Walthamstow.

Tim Seward, director of sales at Clarion, says: “We’ve performed very well. We have just had one of our best months in January, actually. In Walthamstow we had 12 reservations in January.” Clarion aims to spend £1bn building 50,000 homes over 10 years. A look at its most recent half-year accounts explains the confidence: it boasts a profit margin on sales of 31%, and income of £54m.

L&Q, which has 90,000 homes in London and the South East, declined to put forward someone from its development team to speak, but a spokesperson says: “So far this financial year, our operating surplus is at £311m, £22m ahead of budget. This is primarily because of better-than-expected sale completions on shared ownership and outright sale properties.”.

Then there are smaller players. Southern Housing Group, which has 27,000 homes, is ramping up its development programme from 393 completions in 2016/17 to 500 a year, all in this region.

Although it only completed 49 for market sale last financial year according to its accounts, contributing £18.2m to its £85.2m surplus, this represents a doubling of profit from the year before. Shared ownership sales added another £18.9m.

“Our affordable housing programmes aren’t heavily reliant on cross-subsidies from sales, and demand for shared ownership in the areas we operate in remains strong. So at the moment, we haven’t seen a reduction in house prices in those areas,” says Alan Townshend, group development director at Southern.

“Cross-subsidy will play an ever more important role in whether social housing gets built”

The figures are impressive, but as much as they tell a story of healthy profits, they also give a clue as to why housing market swings are of ever more importance to the sector.

Traditionally, social landlords have been sheltered from stormy market conditions, because building for market sale was limited if it existed, and social housing programmes were supported by higher government grants. Now, cross-subsidy will play an ever more important role in whether social housing gets built.

Still, associations don’t see themselves as exposed to the part of the housing market that is slowing down: high-cost, luxury homes. In January, The Guardian reported that 1,900 “ultra-luxury” flats were built in London in 2017 – but more than half failed to sell, leaving “posh ghost towers” dotted about the capital.

Search Acumen’s latest tracker (above) shows a fall in activity

And while the Financial Times reported last year that housing associations were building “luxury” homes to subsidise new social housing, most development directors Inside Housing spoke to say they are not targeting the most expensive part of the for-sale market, where most of the slowdown has occurred

For example, Tom Titherington, executive director of property and growth at 21,000-home Catalyst, says: “Clearly the market is changing but we have not experienced any significant drop in sales prices. To an extent this is due to the nature of our programme – we have very little in London above £800 per square foot; most of our sales are significantly below this level.”

This is expensive compared to the national average, but those luxury “ghost towers” are on the market for around £1,000 to £1,500 per square foot. “It is too early to read the impact of Brexit, except at the more expensive end of the market where you can see that stock is accumulating,” Mr Titherington continues. “For some schemes you have to work harder for footfall. Although, this is not true in most places and demand for the right schemes in the right places is still increasing.”

James Chatt-Collins, director of sales and marketing at 38,000-home Metropolitan, says of the slowdown: “It’s something we’ve started to see at some sites, but it’s by no means evident across the board. For us it’s quite price dependent – more affordable property is still performing very well, while higher-value property is experiencing some slowdown in take-up, with values not rising at the rates we had become used to seeing.”

The property website Zoopla is advertising many heavily discounted properties in the south east

Nick Hutchings, commercial managing director at 37,000-home A2 Dominion, says the landlord has seen a slowdown in sales rates in “some areas”, although other areas remain “fairly resilient”.

While parts of the regional market weaken, housing associations are ploughing more resources in. It is hard to find a development director who will admit to being particularly worried by this dynamic, or who isn’t “looking for new opportunities”, to build more, as Catalyst’s Mr Titherington puts it.

One reason is that associations consider themselves as aiming at what is a relatively more affordable part of the private sale market, where demand is high. The other is that they feel confident in their market analysis and risk mitigation.

“We develop and build homes for sale and shared ownership but we also provide affordable rent housing, private rent and supported housing, which means that should the sales market slow, we have other income streams. The slowdown of the market in some areas has seen private investors leave, which has left gaps in the market rent sector for long-term asset managers such as ourselves,” adds Mr Hutchings of A2 Dominion.

“Housing associations are more able to weather market fluctuations than traditional house builders,” Robert Grundy, Savills

“We stress-test all our products, [asking] what would happen if prices dropped by 5-15%,” says Mr Seward from Clarion. Then there is in-depth research, “so we understand what the market is in these areas” where homes are being built.

Keeping new developments below the price point where buyers could make use of Help to Buy is another strategy. On many projects, Clarion builds as part of a joint venture with a private developer, sharing the risk. And, in case of real trouble, the landlord could always look at switching tenure, and changing what was going to be a market sale property into shared ownership.

Switching tenure is one of those “exit strategies” that puts housing associations at an advantage over other house builders – but, if exercised, it is hard to see how it would avoid cutting into the association’s business plans.

“Housing associations are more able to weather market fluctuations than traditional house builders,” says Robert Grundy, head of Savills Housing Consultancy.

“The first choice would be to sell, then they’d get a lump sum, but if for any reason they can’t sell for the price they want to achieve they could rent the property on the open market, among other options. However this isn’t the same as receiving a capital sum and would require adjustments to the business plan.”

For now, associations seem to be far off taking any drastic measures. The housing market is not in dire straits, either. But development directors will not be taking their eyes off what happens in the market next.